September usually brings the start of a new school year, cooler temperatures, football, and a time for reflection in the final quarter. This year, September brought concern, bordering on panic, over proposed changes to the Internal Revenue Code (“Code”) when Congress released legislation containing several proposals eliminating the benefits of many tried and true Estate Planning techniques. Estate Planning attorneys scrambled to understand the potential modifications to the Code that included acceleration of the reduction in the estate tax exemption amount, taxation of formerly non-taxable transactions between grantors and grantor trusts, eradication of valuation discounts, elimination of stepped-up basis at death, and increased tax rates. Former clients worried about prior transactions and anxious new clients rushed to utilize expiring techniques and the higher estate tax exemption amount. Once again as it did in 2020, the last quarter of the year threatened to overwhelm Estate Planning attorneys as they spent hours reviewing the Build Back Better Act (the “Act”), attending educational seminars, digesting articles, blogs, and opinion pieces about the Act, and calming nervous clients about the consequences of pending and prior transactions. The Act contained retroactive enactment dates giving attorneys and clients little opportunity to plan for the sweeping changes and underscoring the feeling that the sky was falling.
Estate planning went mainstream and even those with modest estates were apprehensive as newspapers and magazines published article after article scaring everyone into thinking that the Act would permanently and detrimentally alter the Estate Planning landscape. Temporary relief appeared at the end of October when the House Rules Committee released a revised version of the Act (H.R. 5376) eliminating the most egregious provisions including the higher individual and capital gains tax rates, the lower estate tax exemption amount, the rules taxing transactions between grantors and grantor trusts, and keeping both valuation discounts and stepped-up basis at death. As of this writing, the Act sits before an evenly split Senate. Critics of the Act point to rising inflation as an impediment to the Act becoming law, while proponents argue that the economic benefits that the Act would provide to lower income families would ease inflation long term. The Act seems to have stalled in 2021 even though this version reflects measured changes to the Code affecting mostly the wealthy: well-paid executives, athletes, entertainers, entrepreneurs selling a business, and non-grantor trusts.
The Act could pass sometime in 2022, but it’s likely that would require significant changes. Perhaps more likely, the Act will die altogether, although President Biden continues to express confidence that the Act will become law. Regardless of the status of the Act two things are clear: the sky is not falling and Estate Planning should be top of mind for all individuals. For clients with a taxable estate or in the top tax brackets, it makes sense to begin or complete planning sooner rather than later. Individuals can do this by utilizing the estate tax exemption amount prior to 2026, at which time it will be halved. Everyone should review their current plan with the aid of a qualified Estate Planning attorney to ensure that it still accomplishes their objectives. Your plan should focus on long-term goals rather than potential policy changes. The last three years have shown us that policy changes are inevitable; however, a flexible plan offers the best protection against future legislation and the unknown.
When you gather with family and loved ones for the holidays, talk about your collective values and how each individual views and measures success. What you learn might surprise you and cause you to reconsider your estate plan. Talk about steps everyone can take to achieve your collective and individual goals as support may come from untapped resources. Remember that when generational wealth transfer fails, it’s not always because of poor planning or failed investments, it’s often a breakdown of communication and trust. Engaging in these conversations at holiday gatherings may seem counterintuitive, but the festivities tend to reduce tension and encourage more frank discussions. You may consider creating a family statement or theme that provides an opportunity for everyone to feel included in decision-making. Consider how the plan you have implemented or failed to implement will look in six months, one year, five years, or even ten years. This may help unmotivated individuals complete Estate Planning or may cause you to revise your plan. If you have a family business or charitable intent, these suggestions may help uncover and resolve underlying issues and concerns.
After all the fuss surrounding the Act, it’s comforting to know that the Estate Planning world will continue mostly as it was. Even Jeopardy! has acknowledged that Estate Planning has gone mainstream with the following answer in the category “What Does It Prevent” on the December 9, 2021, episode: “A Living Trust: This court procedure to carry out the terms of a Will.” That answer, What is probate?, of course! The last two years have been some of the most tumultuous for Trusts and Estates attorneys and clients, alike. Let’s hope the New Year will bring a new calm to our world.